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Journal ArticleDOI

Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records

01 May 2011-Quarterly Journal of Economics (Oxford University Press)-Vol. 126, Iss: 2, pp 749-804
TL;DR: In this article, the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms, and they develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs.
Abstract: We show that the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms. We develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs. We present evidence supporting three predictions of this model by analyzing bunching at kinks using Danish tax records. First, larger kinks generate larger taxable income elasticities. Second, kinks that apply to a larger group of workers generate larger elasticities. Third, the distribution of job offers is tailored to match workers' aggregate tax preferences in equilibrium. Our results suggest that macro elasticities may be substantially larger than the estimates obtained using standard microeconometric methods.

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Citations
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Journal ArticleDOI
TL;DR: In this paper, the authors provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis, and discuss the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 individual income tax rate increase in the United States.
Abstract: This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates using tax return data. First, we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis. We discuss what other parameters should be estimated when the elasticity is not a sufficient statistic. Second, we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the United States to illustrate those issues. Third, we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research. ( JEL H24, H31, J22)

894 citations

Journal ArticleDOI
TL;DR: In this paper, the authors argue that gender identity norms induce an aversion to a situation where the wife earns more than her husband, and they present evidence that this aversion also impacts marriage formation, the wife's labor force participation, the spouse's income conditional on working, marriage satisfaction, likelihood of divorce, and the division of home production.
Abstract: band’s income. We argue that this pattern is best explained by gender identity norms, which induce an aversion to a situation where the wife earns more than her husband. We present evidence that this aversion also impacts marriage formation, the wife’s labor force participation, the wife’s income conditional on working, marriage satisfaction, likelihood of divorce, and the division of home production. Within marriage markets, when a randomly chosen woman becomes more likely to earn more than a randomly chosen man, marriage rates decline. In couples where the wife’s potential income is likely to exceed the husband’s, the wife is less likely to be in the labor force and earns less than her potential if she does work. In couples where the wife earns more than the husband, the wife spends more time on household chores; moreover, those couples are less satisfied with their marriage and are more likely to divorce. These patterns hold both cross-sectionally and within couples over time.

740 citations

Journal ArticleDOI
Koichiro Ito1
TL;DR: In this paper, the authors exploit price variation at spatial discontinuities in electricity service areas, where households in the same city experience substantially different nonlinear pricing and find strong evidence that consumers respond to average price rather than marginal or expected marginal price.
Abstract: Nonlinear pricing and taxation complicate economic decisions by creating multiple marginal prices for the same good. This paper provides a framework to uncover consumers’ perceived price of nonlinear price schedules. I exploit price variation at spatial discontinuities in electricity service areas, where households in the same city experience substantially different nonlinear pricing. Using household-level panel data from administrative records, I find strong evidence that consumers respond to average price rather than marginal or expected marginal price. This suboptimizing behavior makes nonlinear pricing unsuccessful in achieving its policy goal of energy conservation and critically changes the welfare implications of nonlinear pricing. (JEL D12, L11, L94, L98, Q41)

714 citations

Journal ArticleDOI
TL;DR: The authors evaluate whether macro models featuring indivisible labor are consistent with modern quasi-experimental micro evidence by synthesizing evidence on both the intensive and extensive margins, and they find that micro estimates of intertemporal substitution (Frisch) elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences.
Abstract: We evaluate whether state-of-the-art macro models featuring indivisible labor are consistent with modern quasi-experimental micro evidence by synthesizing evidence on both the intensive and extensive margins. We find that micro estimates are consistent with macro estimates of the steady-state (Hicksian) elasticities relevant for cross-country comparisons on both the extensive and intensive margins. However, micro estimates of intertemporal substitution (Frisch) elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences. The key puzzle to be resolved is why micro and macro estimates of the Frisch extensive margin elasticity are so different.

623 citations

ReportDOI
Raj Chetty1
TL;DR: This paper derived bounds on structural price elasticities that are a function of the observed effect of a price change on demand, the size of the price change, and the degree of frictions.
Abstract: How can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention? I derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand, the size of the price change, and the degree of frictions. The degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum. The bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities. I apply these bounds to the literature on labor supply. The utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1% of earnings. As a result, small frictions can explain the differences between micro and macro elasticities, extensive and intensive margin elasticities, and other disparate findings. Pooling estimates from existing studies, I estimate a Hicksian labor supply elasticity of 0.33 on the intensive margin and 0.25 on the extensive margin after accounting for frictions.

571 citations

References
More filters
Journal ArticleDOI
TL;DR: In this paper, the authors provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis, and discuss the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 individual income tax rate increase in the United States.
Abstract: This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates using tax return data. First, we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis. We discuss what other parameters should be estimated when the elasticity is not a sufficient statistic. Second, we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the United States to illustrate those issues. Third, we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research. ( JEL H24, H31, J22)

894 citations

Book ChapterDOI
TL;DR: A survey of existing approaches to modeling labor supply and identifying important gaps in the literature that could be addressed in future research can be found in this article, where a discussion of recent policy reforms and labor market facts that motivate the study of labor supply is discussed.
Abstract: This chapter surveys existing approaches to modeling labor supply and identifies important gaps in the literature that could be addressed in future research. The discussion begins with a look at recent policy reforms and labor market facts that motivate the study of labor supply. The analysis then presents a unifying framework that allows alternative empirical formulations of the labor supply model to be compared and their resulting elasticities to be interpreted. This is followed by critical reviews of alternative approaches to labor-supply modeling. The first review assesses the difference-in-differences approach and its relationship to natural experiments. The second analyzes estimation with non-linear budget constraints and welfare-program participation. The third appraises developments of family labor-supply models including both the standard unitary and collective labor-supply formulations. The fourth briefly explores dynamic extensions of the labor supply model, characterizing how participation decisions, learning-by-doing, human capital accumulation and habit formation affect the analysis of the lifecycle model. At the end of each of the four broad reviews, we summarize a selection of the recent empirical findings. The concluding section asks whether the developments reviewed in this chapter place us in a better position to answer the policy-reform questions and to interpret the trends in participation and hours with which we began this review. © 1999 Elsevier Science B.V. All rights reserved.

846 citations

Journal ArticleDOI
TL;DR: The authors found that the overall elasticity of taxable income is approximately 0.4 and that the elasticity is primarily due to a very elastic response of tax income for taxpayers who have incomes above $100,000 per year, who have an elasticity between 0.57 and 1.3.

794 citations

Journal ArticleDOI
TL;DR: In this article, the authors used individual tax returns micro data from 1960 to 1997 to analyze whether taxpayers bunch at the kink points of the U.S. income tax schedule generated by jumps in marginal tax rates.
Abstract: This paper uses individual tax returns micro data from 1960 to 1997 to analyze whether taxpayers bunch at the kink points of the U.S. income tax schedule generated by jumps in marginal tax rates. Clear evidence of bunching is found only at the threshold of the rst tax bracket where tax liability starts. Evidence for other kink points is weak or null. The large jumps in marginal tax rates created by the Earned Income Tax Credit generate no bunching for wage earners recipients but substantial bunching for self-employed recipients. In the standard micro-economic model, the amount of bunching should be proportional to the size of the compensated elasticity of earnings with respect to tax rates. We introduce uncertainty and rigidities in labor supply choices to account for the empirical results. Numerical simulations show that, even in those cases, behavioral elasticities consistent with the empirical results are small.

772 citations

Journal ArticleDOI
TL;DR: The authors evaluate whether macro models featuring indivisible labor are consistent with modern quasi-experimental micro evidence by synthesizing evidence on both the intensive and extensive margins, and they find that micro estimates of intertemporal substitution (Frisch) elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences.
Abstract: We evaluate whether state-of-the-art macro models featuring indivisible labor are consistent with modern quasi-experimental micro evidence by synthesizing evidence on both the intensive and extensive margins. We find that micro estimates are consistent with macro estimates of the steady-state (Hicksian) elasticities relevant for cross-country comparisons on both the extensive and intensive margins. However, micro estimates of intertemporal substitution (Frisch) elasticities are an order of magnitude smaller than the values needed to explain business cycle fluctuations in aggregate hours by preferences. The key puzzle to be resolved is why micro and macro estimates of the Frisch extensive margin elasticity are so different.

623 citations